STRENGTHS

WEAKNESSES

Weakened current account

Rising external debt

Skyrocketing inflation

Bottlenecks in infrastructure

RISK ASSESSMENT

Deceleration in activity expected to intensify in upcoming quarters

After dropping by 1.8% year-on-year (YOY) in 2016, GDP recovered in 2017, reaching an annual growth rate of 2.9%. However, in the first quarter of 2018 growth showed some deceleration YOY. Activity expanded by 3.6%, down from 3.9% in the fourth quarter of 2017 and 3.8% in Q3 2017.

In the upcoming quarters, activity is likely to weaken further. Preliminary figures for the second quarter of 2018 have pointed to a sharp deterioration of economic momentum. Growth in 2018 will continue to be undermined by the effects of the worst drought in decades on agricultural activity (the soya crop especially). In addition, the strong depreciation of the Argentinean peso against the US dollar – 50% in the first half of 2018 YOY; more than other currencies of emerging markets – has led the central bank to raise its key rate to 40% per annum, up from 27.25% in early May 2018. The exchange rate depreciation is also expected to take a toll on inflation perspectives, which were already high due to monetary public deficit financing and rising tariffs. The government is set to implement new tariff adjustments and cap the nominal growth of public sector wages. Household consumption should therefore decelerate. Public expenses and investments will also be curbed in response to a tighter fiscal policy.

High exchange rate volatility fed by large twin deficits

The current account deficit reached 4.8% of GDP in 2017, up from 2.7% of GDP in 2016. In Q1 2018, the trend continued and the deficit reached 5.3% of GDP. As activity started to rebound in 2017, the trade and income balances began to deteriorate. Last year, imports rose by 20%against a marginal increase of 1% in exports. The good news is that capital goods have represented a good part of imports (signalling for the renewal of the local industrial park). Additionally, income transfers from foreign investors increased with the activity revival. New foreign direct investments, estimated at 1.3% of GDP in the same period, clearly did not cover the wide current account deficit. That led the government to take advantage of the still abundant international liquidity to finance it. As a result, external debt reached 39.9% of GDP in Q1 2018, up from 36.9% in 2017 and 32.7% in 2016. This financing is highly vulnerable to changes in the mood of financial markets. In 2018 the current account deficit could register a slight reduction as the impact of the slowdown in domestic demand on imports would more than compensate for the weak crop export.

Taking into account the fiscal target, the government was able to over achieve the 4.2% primary deficit target and reached a deficit of 3.8% of GDP in 2017. Notwithstanding, government‘s balance, including interest payment rose to 6% of GDP up from 5.8% in 2016. This year, following the currency crisis in late April, government decided to hasten the rhythm of fiscal consolidation. The primary deficit target was reviewed to 2.7% of GDP in 2018 (from 3.2%) and 1.3% in 2019 (from 2.2%). That still leaves the government in need of monetary and external financing.

With the recent fall and ongoing fragility in the exchange rate on one side, and the expected further erosion in purchasing power, on the other, Mr. Macri re-election chances in the general elections to be held in October 2019 are at stake. The ruling president has seen its popularity eroded in recent months, as the population seems to be losing patience, as tightened monetary and fiscal policy doesn’t seem to be counterbalanced by progress on the inflation front.

Moreover, to try to smooth investors’ nerves and to soften the dependence on capital markets, Argentinean government reached in early June 2018 a three-year deal with the International Monetary Fund for an USD 50 billion credit line. The deal, in counterpart, requires stronger cuts in fiscal deficit, i.e. elimination of primary deficit by 2020. This way, government announced the freezing of public hiring for two years, a sharp cut in non-crucial public works (cutting public investments up to 1.7% of GDP until 2020) and full phase out of gas and transport subsidies. Despite the introduction of social safety net which could encompass a conditional cash transfer programme the agreement with IMF was received with anger by part of the population, which blames the IMF for exacerbating the economic collapse registered in 2001. In disavowal to the IMF loan and to Macri’s austerity measures, a general strike was held in late June, the third since President Mauricio Macri took office in December 2015. For his luck, no opposition leadership has benefited from this breakthrough, yet.

Last update: August 2018

Payment

The most common payment instruments in local commercial transactions are:

Cash (for low-value retail transactions)

Bank transfers

Cheques (ordinary cheques, deferred payment cheques or other types).

- In case of default, these cheques represent an executable legal document which facilitates a fast track legal proceeding.

For international commercial transactions, the most common payment instrument is Bank transfer via SWIFT. Since December 2015, restrictions on foreign exchange controls and fund transfers from Argentina have gradually been removed. At the time of writing, importers no longer require the approval of the Argentine Federal Tax Authority (AFIP) to make payments broad.

Debt collection

Amicable phase and out-of-court settlement:

Both of these options are always preferable to legal action. Negotiations are focused on the payment of the principal, plus any contractual default interest that may be added and accepted by the buyer. Argentinian regulations provide alternative dispute resolution methods, such as mediation, which is mandatory prior to the commencement of any judicial process aiming to reach an out-of-court agreement. The instrument to execute the agreement in this stage is a notarized acknowledgement of debt or a payment plan agreement. Such documents have to be signed by both the creditor and debtor, and must be notarized. At this stage, costs and fees incurred are borne by each respective party.

Legal proceedings:

Argentina is a federal republic (23 provinces and the Autonomous City of Buenos Aires (Federal District)), with two parallel judicial systems: federal courts (organised by the federal government) and provincial courts (organised by each province or federal district). The highest court in the country is the National Supreme Court of Justice. These courts have jurisdiction if:

I. The defendant resides in Argentina

II. The place of performance of any of the obligations is located in Argentina, or

III. Argentinian courts have been chosen as the applicable forum (subject to certain restrictions).

Regarding debtors abroad, Argentinian courts only have jurisdiction when debtors have assets in Argentina (in which case the insolvency proceedings will only involve such assets) or when their principal place of business is in Argentina.

The National Civil and Commercial Code of Procedure classifies proceedings into two types depending on their purpose: ordinary proceedings (juicio ordinario) and executory or fast-track (juicio ejecutivo). Other types of proceedings apply only to particular cases. Each province has its own code of procedure.

Ordinary proceedings usually last between one and four years. If applicable, an appeal may be filled for the Court of Appeals to hear the case.

Executory processes are simplified and prompt proceedings that mainly consist of claimants’ request for the execution of debtors’ assets to obtain payment of a debt. They apply when creditor has documents known as executor titles (titulos ejecutivos), such as public instruments, private instruments signed by the concerned party (debtor or guarantor)and legally acknowledged, bills of exchange, checks or credit invoices. Contrary to ordinary proceedings, it is not necessary to provide proof of the debt. The judgment is delivered between approximately six months and two years.

Costs: court tax (3% of the amount in dispute to be paid by claimants upon commencing the proceeding), lawyers’ fees. The prevailing party is entitled to recover its costs, including attorneys’ fees (subject to court approval).

Documents: All documents (original or notarised copies) submitted to the court must be (i) apostilled (for members of the 1961 Hague convention), and (ii) authenticated by the Argentine consulate with jurisdiction over the issuing country. All non-Spanish documents must be translated by a certified translator registered in Argentina.

Enforcement of a legal decision

For local judgments, final decisions are initially acquiesced to be enforceable. However, if a decision has been appealed, it can be partially enforceable in relation to the part of the judgment that is final. In principle, any of the debtor’s assets can be seized (including but not limited to property, trademarks, and accounts receivable from third parties and shares).

Insolvency proceedings

There are three insolvency proceedings:

(i) Out-of court reorganization procedure (acuerdo preventivo): a proceeding in which the debtor and a majority of unsecured creditors enter into a restructuring agreement. This agreement must be submitted by the debtor to an Argentinian court for it to become enforceable. In practice, out-of-court agreements provide a series of conditions that must be complied with, including a minimum threshold of consenting creditors.

(ii) Reorganization proceeding (concurso preventivo):

A reorganization proceeding can be initiated voluntarily by an individual or entity, who must submit proof of their inability to pay their debts. Debtors must file a petition to the court requesting relief under bankruptcy law. The court will appoint a trustee. All creditors must file evidence of their proof of claim with the trustee (verification de creditor). Debtors must submit a proposal for reorganization and must obtain creditors’ approval during an “exclusive period” of 90 days, with the possibility of an extension of 30 days based on the number of creditors. If the proposal is approved by the majority, the judge reviews the terms of the plan prior to approving it. Upon homologation by the court, the reorganization plan becomes effective to all unsecured creditors (even those who have not agreed to it). A special payment offer can only be proposed and approved for secured creditors. If the proposal is not approved by the required majority (51%), debtor bankruptcy may follow. The process generally takes between one and two years, depending on the volume and nature of debt being renegotiated and the size of the debtor.

(iii) Bankruptcy proceeding (quiebra):

This is initiated when a reorganization proceeding fails, either voluntarily (by the debtor) or involuntarily (by the debtor’s creditors’ request). The petitioner must show that the company is insolvent or that it has entered into a “suspension of payments” status. In case of an involuntary bankruptcy, after the petition has been filed with the relevant court and all necessary evidence is presented, the court will summon the debtor to provide an explanation of the reasons why payments of the obligations in favour of the petitioning creditor have not been made and to prove that the debtor is solvent. If the debtor is unable to do so, the court will declare the debtor bankrupt. Unlike reorganization, bankrupt debtors lose control of the administration of their assets. A trustee is appointed in order to preserve and administer the debtor’s property. As a result, all payments to creditors and debtor must be made through court. All claims and proceedings against the debtor are automatically stayed as from the date of the order that determines debtor’s bankruptcy. All creditors must submit their proof of claims for payment. Once the assets available and the amounts owned to each creditor are determined, the trustee liquidates the assets and proceeds with the distribution of repayment to creditors.